First and foremost, let me wish the best to everyone in the Northeast that is contending with the effects of Hurricane Sandy. As someone who has lived in Florida nearly his entire life, I know firsthand how devastating these storms can be. Above all, I hope everyone is safe and that the eventual damage reports from the storm are nowhere near the forecasts we are beginning to see.
I want to quickly comment on the likely market impact of Hurricane Sandy. I don’t intend this to seem callous since at this time I know many folks are concerned about much more important things than the short term whipsawing this storm might cause the financial markets. At the same time, I want to address some of the most probable scenarios in the financial world and make it known that I believe they would be short lived.
The end of October marks the end of the fiscal year for the vast majority of mutual funds in the United States. As a part of their tax planning, they regularly will look to dispose of a good portion of their losing positions to protect against large taxable distributions to their shareholders. Under normal market operating conditions this phenomenon leads to slightly above normal volatility during the second half of October. This year I expect this condition to be magnified since the markets were unexpectedly closed two consecutive days that run right up against their tax year deadline.
In short, I wouldn’t be at all surprised if the markets were to sell off temporarily as a result of the simple need for a lot of stocks to be sold with a high degree of urgency. There will be a lot of hurried and frantic sellers, and interested buyers will be wise enough to take advantage of their plight, I suspect.
Let me reiterate that I expect this to be a short lived situation. This is the case since the Hurricane’s economic impact isn’t likely to be so severe that it hampers the overall economy. In most situations, the genuine earnings power of the company’s whose stocks are being sold for tax harvesting reasons won’t be affected. But in the short term that simply won’t matter. This is a classic example of how a market can be inefficient in portraying a company’s true worth.
My advice is to not be too concerned about this whipsawing that I think might occur. I wouldn’t suggest either buying or selling assets using the storm as a rationale. Any temporary dislocation in the market is unlikely to be deep enough to create a true bargain worthy of the risk. As I said in the last edition of Worth Considering less than two weeks ago, I expect the markets to pause for a while. This unforeseen condition of Hurricane Sandy will do little more than speed up the healthy corrective phase I expect in the markets. Between a Hurricane hitting the financial center of the world and a closely contested battle for the role of Leader of the Free World coinciding with such a crucial tax deadline impacting one of the largest groups of asset managers in the entire world – a bit of volatility must be endured.
In the end, the storm will have passed – both Sandy and the Election – and we’ll have greater certainty in the financial markets. Remember that that markets tend to do just fine with good news as well as bad; but they don’t do very well with a host of unknowns and a complete lack of clarity. In the coming weeks we’ll have more clarity. I believe the markets will like this clarity more than they would dislike any perceived ‘bad’ outcomes of the election. To me, this means our economy and our financial markets should look better in the coming quarters than it does now no matter who we have elected as our President.
The takeaway –
- Nothing is more important than health and safety. So out thoughts and prayers go to all the people and their families that are being impacted by Hurricane Sandy.
- Don’t be overly concerned that any market dip that might last a few days or so in the wake of Hurricane Sandy is going to usher in a new bear market. At this stage in the economy and with such solid corporate balance sheets, that is simply unlikely. We’ve also seen decent news out of Europe in recent hours as well as more respectable corporate earnings announced. So this dip might not even occur.
- As always Worth Considering has always been intended as an informative source of current communication to you, but please don’t hesitate to call or email if you would like to discuss any of these nuances in greater detail.
Jeff Winn, Financial Advisor Orlando FL
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